Galluccio and Roncoroni (2006) empirically demonstrate that cross-sectional data provide relevant information when assessing dynamic risk in fixed income markets. We propose a theoretical framework supporting that finding, which is based on a notion of ldquo;shape factorsrdquo;. This notion...

Litterman, Scheinkman, and Weiss (1991) and Engle and Ng (1993) provide empirical evidence of a relation between yield curve shape and volatility. This study offers theoretical support for that finding in the general context of cross-sectional time series. We introduce a new risk measure...

We develop a normative framework for the optimal design, value assessment, and risk management integration of combined custom contingent claims. A risk averse firm faces a mix of financially insurable and noninsurable risk. The firm seeks optimal positioning in a pair of custom claims, one...

This paper presents a family of processes to model electricity spot prices in deregulated markets. Besides mean-reversion, a property they share with other comodities, power prices exhibit the unique feature of spikes in trajectories. We introduce a class of discontinuous processes exhibiting a...